The US Dollar Index (DXY), which measures the dollar against a basket of six major currencies, faced renewed pressure during Thursday's Asian trading session after a minor rebound, oscillating around the 100.00 mark.
Investors are weighing the combined impact of escalating Middle East tensions, rising energy prices, and shifting US monetary policy expectations on the currency's trajectory.
Recent military conflicts in the Middle East have intensified significantly.
Following an attack on a US military helicopter, the United States conducted what it termed "defensive" military actions against Iran, which subsequently prompted retaliatory strikes by Iran on US military facilities in Bahrain, Jordan, and Kuwait.
The US Central Command later confirmed conducting airstrikes on Iranian targets on Wednesday.
Former US President Donald Trump indicated that the US might take more severe military measures if an interim peace agreement cannot be reached, while Iran has emphasized it will not yield to external pressure.
Concurrently, Iran's Islamic Revolutionary Guard Corps announced the immediate suspension of all commercial and oil tanker traffic through the Strait of Hormuz, warning that any vessel attempting passage could become a target.
As the Strait handles roughly 20% of global seaborne crude oil shipments, market fears of severe disruptions to energy supply have pushed international oil prices sharply higher, reigniting concerns about global inflationary pressures.
The surge in energy prices has altered investor expectations regarding the Federal Reserve's policy path.
Money markets now price in approximately 25 basis points of potential interest rate hikes by the Fed before year-end, a notable shift from earlier expectations of rate cuts.
While higher interest rate expectations typically enhance the appeal of US dollar-denominated assets, the current market volatility stemming from geopolitical risks and investor concerns about global economic growth are limiting the dollar's upside potential.
On the economic data front, the latest US Consumer Price Index (CPI) for May showed a year-on-year increase of 4.2%, up from 3.8% in April and in line with market forecasts.
The core CPI rose to 2.9% year-on-year, a slight increase from the previous 2.8%, indicating underlying inflationary pressures remain resilient.
Market attention will now turn to upcoming US data, including the Producer Price Index (PPI) for May and initial jobless claims, to gauge the trends in the US economy and inflation, seeking further clues on the Fed's future policy direction.
From a technical perspective, daily charts suggest the US Dollar Index remains in a medium-to-long-term consolidation phase, with the key 100.00 level serving as a crucial battleground for bulls and bears.
Should market expectations for Fed rate hikes strengthen further, the index could challenge the 101.00 to 101.50 zone again.
Conversely, if safe-haven flows shift to other assets or economic data disappoints, the index might retreat towards the 99.00 level or even lower.
Technical indicators like the RSI are in neutral territory, and the MACD shows limited momentum, suggesting the short-term direction awaits fresh fundamental catalysts.
On a four-hour chart, the index shows short-term weakness, with prices suppressed by short-term moving averages, though technical support exists near the 100.00 level.
If upcoming PPI data exceeds expectations, reinforcing the view that the Fed will maintain high rates or even hike, the dollar index could stage a rebound.
Conversely, weaker economic data reviving bets on looser policy could expose the index to further downside risks.
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